FxWirePro: USD/CAD FX options market finds no reason to buy loonie, IV skews move in sync with risk reversals and fundamental drivers

Please be noted that the USDCAD OTC market sentiments show bullish neutral flashes, while positively skewed IVs of 3m tenors signify the hedgers’ interests in OTM calls. Refer above nutshell wherein hedgers seem interested in bidding OTM call strikes upto 1.3050. This dollar upside risk sentiments is majorly owing to the interest over the coming months: the appointment of new members for the Fed’s Board of Governors. The current chair Janet Yellen made it clear that she will leave the board when her successor Jerome Powell is sworn in in February as the new chair.

That means that on February 4 of the 7 seats on the board will become vacant and President Donald Trump will be able to reappoint new members. Depending on the approach of the new members the dollar could appreciate or depreciate if the market expects a more or less restrictive Fed as a result. Should, for example, John Taylor join the board as Vice Chairman the market would price in a stronger rise in interest rates medium to long-term and the dollar would appreciate as a result.

On the flip side, the Bank of Canada (BoC) is likely to have taken a deep breath when it saw the October inflation data on Friday. It fell from 1.6% to 1.4% YoY. The different measures of core inflation also eased slightly and now range between 1.5% and 1.7%. That means it is quite justified that at the rate meeting in October inflation moved to the top position in the statement.

The BoC expects inflation to only return to its target of 2% in the second half of 2018. So far the underlying trend does not suggest otherwise. However, it should not weaken as otherwise the market will come to the conclusion that the two 25bp rate hikes this year to now 1.0% might have been a policy mistake.

The market’s reaction to the inflation data on Friday provided a first taste of what this might mean for the currency: the principally more restrictive approach on the part of the BoC based on solid growth – despite continued cautious words in its statement - could put considerable pressure on CAD. It has not quite yet got to that point, the BoC can wait for the publication of one or two more sets of inflation data.

Let’s hope that the NAFTA negotiations do not turn out to provide a further obstacle for CAD. In any case, the really controversial issues were not discussed in the fifth round that started last Wednesday and will end today.

According to Canadian government sources, no agreement will be reached if the US does not make the considerable concession in some important areas. That means today will not deliver concrete results but only a postponement of the major contentious issues. So, all told no good reasons to buy the loonie at present.

Currency Strength Index: FxWirePro's hourly USD spot index is inching towards 7 levels (which is neutral), while hourly CAD spot index was at shy above -54 (bearish) while articulating (at 10:29 GMT). For more details on the index, please refer below weblink:

http://www.fxwirepro.com/currencyindex.

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